Going Pro Has Its Price
Ready for some jaw-dropping moves by your favorite professional athletes?
Just check out their tax returns.
Behind every sports star who's hauling down the big bucks is a keen-eyed certified public accountant quick-stepping through a maze of state and local income taxes imposed on nonresident athletes, commonly known as the "jock tax."
Professional sports players get taxed by pretty much every city and state in which they play, says Ryan Losi, CPA and executive vice president of Piascik & Associates, a Glen Allen, Va., accounting firm that represents more than 70 professional athletes.
"NFL players typically file in 10 to 12 jurisdictions. NBA is somewhere between 16 and 20. MLB is somewhere between 20 and 26, and the NHL is between 14 and 16," says Losi.
Of the nine states that don't have state income tax, only Florida, Tennessee, Texas and Washington have pro teams, says Robert Raiola, CPA and sports and entertainment group manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa LLC, a Cranford, N.J., firm that represents more than 100 pro athletes.
If you're dazzled by sports players' salaries, here's how the pros play offense and defense to preserve theirs.
How Pro Salaries Are Taxed
Professional athlete salaries, like real estate, are all about location, location, location.
The lion's share of most players' income, their salary, is taxed in the city and state where the team is based. But income from other sources, including endorsements, personal appearances, dividends and interest income, is taxed in their state of residence.
This is the reason New York Giants quarterback and Super Bowl MVP Eli Manning lives in Hoboken, N.J., instead of in the Big Apple. It's simple arithmetic, says Raiola.
"If he were a resident of New York, he'd pay 8.97% New York state tax and another 3.78% New York City tax on top of that, not only on his wage income but also his endorsements and investment interest," he says. "In New Jersey, he only pays 8.97%."
"Jock tax" assessments to players by away-game jurisdictions are credited back to the player in their state of residence but only to the maximum rate in their home state. Players who live in the nine states without state income tax (Alaska, Florida, Nevada, New Hampshire, Tennessee, Texas, South Dakota, Washington and Wyoming) pay full fare on "jock tax" assessments, Raiola says.
The 'Jock Tax'
Taxing states and some municipalities impose a "jock tax" on visiting professional sports players in one of two ways. Most use the "duty days" method, which divides the player's total number of work days during the season by the number of days spent playing in the state. A few use the "games played" method, which divides the total number of games in the season by the number played in the state.
And just to give accountants gray hairs, no two states do it exactly alike.
"They all agree on the fraction; they just don't agree on what goes into the numerator and the denominator," says Losi. "Some jurisdictions treat practices and OTAs (organized team activities) as a working day. Others say that if you travel but don't play, that doesn't count."
All those state filings can make for one doorstop of a tax return.
"Thank God for e-filing," says Raiola. "In the old days, a player who lived in California not only had to file in all of those different states but was required to provide a copy of each state return with his federal return. The average NBA player could pay tax in 20 states."
The Invisible Hand of Taxation
Taxes -- or the lack of them -- may also have had something to do with NBA all-star and 2010 free agent LeBron James' choice to play for the Miami Heat instead of the New York Knicks. Losi points to Florida's lack of a state income tax.
"That may have been one of the factors that led LeBron to choose Florida versus New York," says Losi. "Ten percent of his first contract was going to be the difference. For him, it was an extra 5 (percent to) 9% difference in tax. That's real money."
But Raiola says what works for a megastar such as LeBron may not be the best move for journeymen players.
"If you live in Florida, the taxes you pay to those other states is really taking money out of your pocket because you're not going to get a credit for those state taxes," he says. "If you live in a nontax state, you could easily end up paying state tax on 60 (percent) to 65% of your earned income from the team, even though you don't have a tax in the state you reside in."
Big Money, Bigger Taxes Overseas
Professional golfers, tennis players and other athletes who compete on the world stage often leave a third or more of their earnings in the local coffers.
"Whenever they play in foreign countries, they have to pay taxes in that jurisdiction, and the tax liability is much bigger than the 5 (percent) to 10% state tax. It's usually in the 30 (percent) to 40% bracket," says Losi. "Usually it's withheld in their prize money, and they can file a nonresident return if they think they might have a refund coming."
Because the United States is one of the few countries that taxes all personal income regardless of source, some pro sports stars who compete internationally actually have a financial disincentive to make their home in America.
"If they're (not U.S. citizens or green card holders) and they're not planning to stay here more than 183 days out of the year, from a tax perspective it absolutely makes sense to not live in the U.S.," says Losi. "All the foreign golfers who come here to play, if they want all of their foreign prize money and endorsement money to be taxed, all they have to do is hang out here for 183 days."
The Canadian Tax Treaty
The tax treaty between the United States and Canada preventing double taxation for those who cross the border for work can complicate tax planning for Canadian-based NBA, NHL and MLB players. (There are no NFL teams north of the border.)
This is because Canada's top tax rate of 48% is 13% higher than the U.S. maximum (35%), and Canada taxes individuals based on their residency while the U.S. taxes people based on citizenship.
"As a result, it's advantageous for Canadian players to move to the U.S.," says Losi. "That's what a lot of the NHL guys do. As long as you don't have Canadian-source income, you don't pay Canadian tax, you save 13% on every dollar, plus there are a lot more deductions and credits in the U.S."
While the reverse is often true for U.S. players signed to Canadian teams, Raiola sees a solution to help even out the tax discrepancy.
"Get a signing bonus from a Canadian team, which under the treaty is only taxed at 15%," he says. "Canada withholds 15%, you get a full credit, pay the 20% down here, and you're not penalized for playing for a Canadian-based team."
Did You Know?
- Sports players can deduct most expenses associated with preseason training not reimbursed by the team including hotel, apartment or home rental, meals, transportation to the training location, and car rentals.
- Players must claim the value of gift bags and other "swag" they receive at awards ceremonies and celebrity events as income.
- Most NFL, NHL and MLB players are paid only during the season. While NBA players can choose to be paid seasonally or year-round, Raiola says 3 out of 4 opt to be paid year-round.
- Players can deduct the cost of fines imposed by their team or league. League fines typically go to charity.
- An agent's fee is fully deductible.
- Lockouts can cost a player plenty. The current NBA season, which was shortened by lockout from 82 to 66 games, resulted in a 20% hit on all player salaries. "For Kobe Bryant, that's $5 (million) or $6 million that he's never going to make back," says Raiola.
- All four leagues and the Professional Golfers' Association of America, or PGA, offer pension plans. In addition, the NFL offers a 401(k) with a 200% match, and the NBA offers a 401(k) with a 140% match